Credit for Income Taxes Paid to Another State

Full-year and part-time residents may claim a tax credit for income tax paid to another state or country.

Eligibility

Who Can Claim the Credit

The credit is allowed only to individuals, estates, and trusts for taxes paid to another state or country on income derived from sources within the other state or country while a resident of Montana, that is taxable under the laws of the other state or country.

Credit Requirements

Income must be derived from within the state or country imposing the tax.

For example, if an employee worked remotely in Montana and is subject to income tax in another state based on the “convenience of the employer” rule, the employee would not be eligible for the credit because the income was derived in Montana and not within the other state.

The credit is not allowed if the other state or country allows Montana residents a credit against the taxes imposed by the other state or country for taxes paid or payable under Montana law.

Foreign Tax Credit Limitation

Individuals are not entitled to a Montana tax credit for taxes paid to a foreign country to the extent that the federal Foreign Tax Credit was claimed.

Qualifying Taxes and Requirements

Qualified Tax Types

• Income taxes paid to another state or country to the extent that the other state or country does not provide a tax credit on those same income taxes.
• Income tax paid on behalf of a partner in a partnership or shareholder in an S corporation that is measured by and imposed on net income.

Deduction Rules

Any deductions or expenses taken for other state or foreign income taxes must be added back to your federal taxable income.

Payment Requirements

Taxes eligible for the credit must be paid in full and generally are based on a filed return.

Amounts withheld on your behalf by an employer or pass-through entity can be used for the credit if the withholding satisfies your tax reporting obligation to that state or country.

Benefit

The credit is equal to a portion of the tax paid to the other state or country to the extent of the amount of Montana tax that would be paid on the income.

Carryover

The credit is nonrefundable and cannot be carried over to another tax year.

Forms and Resources

• Individual Income Tax Form (Form 2) and instructions
• Montana Income Tax Return For Estates And Trusts (Form FID-3) and instructions

Related Laws

• 15-30-2302, MCA
• ARM 42.4.4